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Plan Well, Retire Well

Saving and investing your money

What should you do with your tax refund?


Now is the time of year that most Americans are preparing and filing a tax return. If you will be receiving a tax refund this year, you may be thinking about what to do with the refund. In fact, the money may already be spent. For many consumers the "extra" money is often spent on a vacation, an extra consumer item for the house or maybe to pay off last years holiday bills. Consider the ideas below as you decide what to do with your tax refund:

 

1. Pay off high interest debt. High interest debt for most consumers is a credit card or credit cards. While it may depress you to send your tax refund to pay only a portion of an 18% interest rate credit card balance, it can save you years of added interest payments. If you were to invest the money, you more than likely would not earn an 18% return; so paying down your debt is like receiving an 18% rate of return.

2. Open an emergency savings account, if you don't already have one. Most financial experts recommend having an emergency savings account with 3 – 6 months of living expenses. An emergency savings account will help if you experience a loss of income or have an unexpected expense.

3. Think about investing. Consider opening an individual retirement account or investing in a mutual fund or stock. There are many great options available that allow for small amounts to be invested each month. With as little as $25 you may be able to start a mutual fund.

4. Save for a child's education. There are numerous investment vehicles to help save for a child's education. You might consider a Roth education IRA, mutual funds, or state sponsored college savings plans.

5. Perhaps the best thing to do with your tax refund is to avoid receiving one. By getting a tax refund, you have given the government an interest-free loan, and are being repaid. Consider changing your withholdings so you have an extra amount in your paycheck each month. Even an extra $50 or $100 can make a big difference!



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